What is the Value of Logistics for a Large Pharmaceutical Firm?

By

Prasoon Tiwari

Master of Business Administration, Eller College of ManagementThe University of Arizona, Tucson Arizona, 2006

Submitted to the Engineering Systems Division in Partial Fulfillment of theRequirements for the Degree of

MASTER OF ENGINEERING IN LOGISTICS

at the

MASSACHUSETTS INSTITUTE OF TECHNOLOGYJUNE 2007

© Prasoon Tiwari. All rights reserved.

The author hereby grants to MIT permission to reproduce and to distribute publicly paperand electronic copies of this thesis document in whole or in part.

Signature of Author...................................................................... ............................. ............Engineering Systems Division

Ji e 6th, 2007

C - Mahender SinghResearch Associate, MIT Center for Transportation and Logistics

Thesis Super sor

A ccepted by ............................................ ................................... ...... ...... ..: ...............AIosef Sheffi

Professor, Engining Systems DivisionProfessor, Civil and Environmental Engineering Department

MASSACHE TITUT Director, MIT Center for Transportation and LogisticsOF TECHNOL(>-Y'

JUL 3 1 2007

LIBRARIES • C& I

What is the Value of Logistics for a Large PharmaceuticalFirm?

by

Prasoon Tiwari

Submitted to the Engineering Systems DivisionOn June 6th, 2007 in Partial Fullfillment of the

Requirements for the Degree of Master of Engineering in Logistics

Abstract

Understanding business needs arising out of both, external and internal environments, isan essential first step in determining the value of logistics in a large pharmaceutical firm.In this research, we have used a variety of conceptual models and frameworks to exploreand understand the pharmaceutical business environment and its present & futurebusiness needs. Specifically, two questions anchored the research: What will be theimpact of drug technologies on logistics activities? And, should logistics activities beoutsourced?

Drug technology contributes significantly to a pharmaceutical firm's revenue, butmarketing also play an important role in a drug's success by influencing doctors'decisions in favor of the firm's drugs. Since it is difficult to ascertain the true value of apharmaceutical drug, perception of service plays a critical role in conveying the positiveattributes of the drugs to the potential consumers. In this context, this thesis investigatesif logistics & supply chain strategy should be aligned with marketing and drugtechnology strategies to maximize pharmaceutical firm's competitive advantage. To thisend, we investigated the impact of dominant drug technologies on the logistics functionin the pharmaceutical industry as technology drives revenue growth in the industry.

It was found that business & competitive needs lead firms to develop new drugsusing different types of innovative drug technologies. Indeed, the requirements ofdifferent drug technologies are different and impact business decisions related toprocurement, inventory, transportation, and facility network design in different ways.Therefore, by ignoring the impact of chosen technology on supply chain design, a firmwill find itself in a difficult position. Thus, we strongly believe that supply chains play animportant role in extracting the maximum value out of its huge investment in drugdevelopment and marketing.

Therefore, outsourcing of logistics activities should be done only after analyzinghow different drug technology categories will affect operational metric requirements oflogistics activities and if logistics activities can protect the economic profits.

Thesis Supervisor: Mahender SinghTitle: Research Associate, MIT Center for Transportation and Logistics

Acknowledgement

It has been a great learning experience for me in knowing how a firm's technology can

both influence and play an important consideration in its supply chain designs. By

understanding its external business environment and the present & future business trends

in drug technology, a firm can achieve a significant competitive advantage by leveraging

its supply chain design as an important component of business strategy. All this learning

would not have happened without the contribution of following people:

I would like to thank John Mancuso, Vice President Global Logistics Pfizer

Corporation, and Robert McMahon, Director Logistics Strategy Pfizer Corporation, in

sharing with me their viewpoint on Pfizer logistics' strategic goals and objectives. I

would also like to thank Tom Elliott, Director/Site Leader Pfizer's Parsippany Logistics

Center and his staff in giving me a tour of the facility and presenting their facility's

present goals & objectives to me. Their critical inputs provided me with the

understanding of logistics issues and challenges that the department faces in a large

pharmaceutical firm.

I would like to thank my wife Dr. Rishita Tiwari who supported me in this endeavor.

Finally, I would like to acknowledge Dr. Mahender Singh for guiding me in right

direction for success.

Table of contents

Abstract................................................................................................ 2Acknowledgement .............................................................................................. 3List of Figures...................................................................6List of Tables....................................................................................6...

1 Introduction ....................................................................................................... 7

1.1 Two Different Pharmaceutical Technologies ..................................... .... 8

1.2 Current State of Logistics ................................................................................... 9

1.3 Thesis Overview ............................................................................................... 12

2 Literature Review ................................................................................................... 15

3 Chemically-Synthesized Compounds ........................................ .......... 20

3.1 The Role of Generics .............................................................................. 20

3.2 Logistics Flows ................................................................................................. 22

3.3 Manufacturing Process...................................................................................... 24

3.4 Vendor Managed Inventory ..................................... ..... ............... 26

3.5 Channel Management ............................................................................ 28

4 Biologics ................................................................................................................... 31

4.1 Biologics Market Trends ................................................................................... 31

4.2 Biologics Product Characteristics and its Unique Requirements .................. 33

4.2.1 Cold Chains......................................................................................... 36

4.2.2 Packaging .................................................................................................. 37

4.3 Channel Management ....................................................................................... 39

5 Additional Considerations ......................................................... 40

5.1 Compliance ................................................................................................. 40

5.1.1 Process and Analytical Technology ...................................... ...... 40

4

5.1.2 M anaging Com pliance .............................................................................. 41

5.2 Security .................................................. ..................................................... 42

5.3 The Role of RFID .............................................................. ......................... 43

5.4 The Role of Inform ation Technology ............................................................... 44

5.4.1 Cathay Pacific Case Study ..................................... ..... ............ 46

6 A nalysis .................................................................................................................... 50

6.1 The Pharmaceutical Industry Dynamics & its Impact on Logistics Design..... 51

6.2 Outsourcing of Logistics A ctivities .................................................................. 56

6.3 Operationalizing Outsourcing Decision................................. .......... 59

6.3.1 Key to Outsourcing ................................................................................... 61

6.4 Building an Excellent Supply Chain ................................................................. 61

7 Conclusion ............................................................................................................... 63

R eferences ........................................................................................................................ 65

List of Figures

Figure 1 The Changing Face of Logistics.......................................................11

Figure 2 Inefficiencies Associated with Chemically-Synthesized Compounds ..........25

Figure 3 The Logistics Performance Measures Associated with the Drug Lifecycle......30

Figure 4 The Framework to Find the Value of Logistics in the Pharmaceutical Industry.50

Figure 5 The Pharmaceutical Industry Dynamics................................ .......... 52

Figure 6 The Drug Prices vs. Patient Population................................................ 54

Figure 7 Expected Future Trends in Supply Chain Design....................................55

List of Tables

Table 1 2006 Inventory Turns Ratios ......................................... ............... 23

1 Introduction

The pharmaceutical industry has witnessed a flurry of mergers and acquisitions over the

years. For instance, in 1986, there were 121 strategic alliances in the industry alone, and

the number increased to 400 by 1993. By 2001, there were 425 alliances between

pharmaceutical firms in the first six months of the year, and an additional 383 alliances

with biotechnology firms.

The current business model in the large pharmaceutical companies is built around

the successful development and marketing of blockbuster' drugs. At Pfizer, for example

blockbusters accounted for 80% of its current pharmaceutical sales. Blockbuster drugs

such as Celebrex and Vioxx entered a huge, well-developed market of perennially

unsatisfied but motivated patients with a non-life-threatening disease and offered

significant advantages over older products leading to astronomical sales. Breakthrough

products reap excellent profits for the pharmaceutical firms because these drugs tend to

significantly reduce hospital stays and are highly desired in the market place for reduced

patient costs.

However, the blockbuster model is not immune to problems as it is becoming

increasingly difficult for companies to come up with innovative drugs on a regular basis

for various reasons. Large pharmaceutical companies are trying different strategies to

continually develop blockbusters but recent data is not very encouraging. These days,

blockbusters are being increasingly procured through mergers and acquisitions.

1 Blockbusters are classified as drugs with greater than $1 billion annual revenue.

Furthermore, the pharmaceutical industry is in a state of flux with respect to which

technology will drive the industry in the future.

1.1 Two Different Pharmaceutical Technologies

The products in the pharmaceutical industry can be segmented based on two

fundamentally different technologies, namely chemically-synthesized compounds or

small molecules and biologics or large molecules. It is important to understand the

difference between these two technologies as they affect the underlying nature of the

drug, which in turn has significant supply chain implications. The distinction between

these two technologies is explained in some detail in the next few paragraphs.

In 1872, Paul Ehrlich proposed the concept of "lock" and "key" in enabling the

drug discovery process. Ceruti and Oestreich explain the concept as follows:

"The biological process can be described as a series of coordinated opening and closing

reactions, in which a "key", represented by the gene or protein that plays a role in a

particular disease, perfectly interacts with its "lock", the cell surface or nuclear receptor

and induces a specific process. Some diseases are therefore caused by the absence or

inappropriate function of a key. Others are due to the malfunction of the lock. One way in

which a drug corrects this imbalance is by substituting the missing or failing key."

However, during the time of Paul Ehrlich, technology was not available for drug

firms to follow this approach to find highly effective new drugs. Therefore, the drug

firms relied on "random screening" of both natural and chemically-synthesized

compounds against known targets. This led to a highly inefficient approach of first

creating large libraries of compounds and then testing these compounds on animals

before testing them on humans to investigate the therapeutic effects of these compounds.

8

According to Ceruti and Oestreich, 95% of the drugs currently being used have

been developed using this traditional approach, which has also led to the development of

most known blockbuster drugs. These drugs attack the disease via chemical interactions

and usually targeted towards broader chronic markets. Only recently, science has

progressed to a level where tools and techniques can be developed to address the disease

on a molecular level. This development has led to the emergence of the field of biologics.

According to U.S. Food and Drug Administration, biologics or biologic therapies

are isolated from a variety of natural sources - human, animal, or microorganism - and

may be produced by biotechnology methods and other cutting-edge technologies. Gene-

based and cellular biologics, for example, often are at the forefront of biomedical

research, and may be used to treat a variety of medical conditions for which no other

treatments are available.

The stability issues associated with biologics place significant constraints on

logistics activities in terms of managing cold chains, developing highly engineered

packaging skills, and understanding the possible impact of RFID waves on drug stability.

These complexities are likely to result in higher costs and challenging transportation

issues. Whereas, chemically-synthesized drugs generally have stable structures and can

be transported & delivered in cost-effective ways.

1.2 Current State of Logistics

Recent trends suggest that the pharmaceutical industry dynamics are changing rapidly

and becoming increasingly uncertain. As a result of these changes, the role of the

logistics department has also undergone tremendous transformation but unfortunately the

changes are often ignored and not considered carefully. It is typical for the

9

pharmaceutical companies, especially the large pharmaceuticals to exert intense cost-

reduction (and outsourcing pressures) on the logistics department without investigating

the actual value of this function and its nuances.

In this thesis, we will highlight and discuss some of the key challenges and

questions that we encountered during the course of researching the role of logistics in the

large pharmaceuticals. First and foremost, we validated the fact that the logistics

function in the pharmaceutical industry is highly cross-functional and not considered

critical for the success of the organization. In most cases, cost optimization becomes the

main objective of the logistics function and constraints imposed by cross-functional

policies act as barriers to proper flow of value, product, and information.

To this end, we have identified two key questions to anchor our research:

1. What will be the role of logistics for a pharmaceutical firm in the future?

2. Which logistics related activities could be outsourced?

Using these as the context, the thesis attempts to explore and redefine the role of logistics

in the pharmaceutical industry, especially the large pharmaceutical company. Note that

we will use the terms "supply chain" and "logistics" interchangeably to reflect the broad

scope of involved activities. Generally speaking, logistics activities are a subset of supply

chain activities.

In principle, key supply chain related decisions in the pharmaceutical industry fall

into following five decision categories: channel management; information technology;

outsourcing; security & compliance; and supplier management as shown in Figure 1.

Gaining a good understanding of these decision categories will lead to a better

appreciation of the value of logistics in the pharmaceutical industry.

Impact of futuFutu re on current dere requirementscisions

Current state of logisticsfunction in PharmaceuticalIndustry which is primarilydriven by blockbusters. Butthe current model is facingpricing pressure, competitionfrom generics, and slowinnovation growth rate

New r

Supply Chain Designs to manage:BiologicsChemically-synthesized

Compounds

Decision CaComplex Manufacturingl OutsourcinProcess Flows Requirements Supplier M

Security &Channel MInformation

Alignment with marketing& technology (S&OP)Role of RFIDBarriers to entryPerformance Measures

ole of logistics

Figure 1 The Changing Face of Logistics

tegories:g,anagement,Compliance,anagement,Technology

Lapide [27] emphasizes the importance of alignment of supply chain strategy with

business strategy. In that sense, it is necessary to gain a good understanding of the

business strategy in order to find the value of logistics for a large pharmaceutical firm.

Academic frameworks suggest that business strategy is composed of three key

components: marketing strategy, technology strategy, and operations strategy. Firms

often tend to ignore operations strategy in the favor of the other two as a component of

business strategy. However, recently supply chain aspect of operations strategy has

gained extreme importance in providing competitive advantages to firms in different

industries. The thesis explores if supply chain strategy can play an important role in

protecting or enhancing economic profits of pharmaceutical firms.

The thesis recognizes the importance of the product-oriented framework that

Singh [49] has leveraged to explore the state of the art of the overall pharmaceutical

supply chains. The product-oriented framework is also well suited to answer the above-

Present

mentioned questions related specifically to logistics decisions. To be sure, a firm's

products and the underlying technologies embody the firm's strategy and the way that

firm will choose to compete. Thus, it is natural for supply chain and logistics flows to

align with the strategic product attributes. The product-oriented framework makes the

decision categories quite meaningful when seen from both present and future contexts of

different kinds of drug technologies.

Our research builds on the elaborate discussions on the chemically-synthesized

supply chains by Singh [49] and extends the framework to the biologics supply chains.

We will investigate the present and future impact of these two dominant supply chains on

the overall business environment. We will use a variety of concepts & frameworks from

extant literature to further enrich the discussion.

In summary, the thesis attempts to highlight the changing face of logistics in the

pharmaceutical industry and identify the important drivers and parameters that the

pharmaceutical companies should consider before finalizing their business strategies,

organizational structures, and sourcing decisions.

1.3 Thesis Overview

Chapter 2 points out the business cases and articles that were reviewed to gather data and

information on current trends in the pharmaceutical industry. Strengths, weaknesses, and

limitations of various conceptual and economics frameworks are also described.

In chapter 3, we highlight threats to the economic profits of large pharmaceutical

firms due to generics competition and shorter exploitation of drug patent life. Therefore,

cash flow maximization of branded drugs has become the most important factor.

We explore the issue of inefficiencies that exist in the push-pull interface between

primary and secondary manufacturing sites, and how pharmaceutical firms can improve

their cost structures and inventory turns. It was observed that large pharmaceutical firms

out perform small & mid-sized firms in managing the push-pull interface. However,

amongst the large pharmaceutical firms, there is a wide disparity with respect to which

firm can best manage its inventory turns. Finally, this chapter ends by specifying

important operational metrics that should be considered in defining channel relationships.

Chapter 4 highlights emerging trends in biologics. As mentioned earlier,

understanding product and process complexities has become increasingly important in

supply chain designs due to degeneration, shorter lifespan, and complex handling

requirements of biologics drugs. The industry is witnessing emergence of niche players

who either have capabilities or are developing capabilities to meet these product and

process complexities. Two examples belonging to Novartis' and Monsanto's biologics

drugs are considered to illustrate how these firms have managed product and process

complexities in supplying biologics by partnering with niche players.

The chapter also highlights an added advantage of complex logistics requirements

in terms of creating entry barriers against generics competition because quality attributes

for biologics are harder to define.

In chapter 5, we highlight how relevant issues related to compliance, security,

RFID, and information technology impact supply chain designs.

Securing pharmaceutical supply chains is a pre-requisite for being in the business.

However, pharmaceutical firms might be better off by developing a uniform platform that

will lead to reduced costs and address concerns of regulatory bodies appropriately.

RFID is an emerging technology that has a lot of potential in enabling innovative

strategies. At the same time, firms will have to wait to overcome certain challenges

before the true potential of this technology is realized.

Chapter 6 highlights the changing industry dynamics due to increase in world's

ageing population and perception of increased healthcare costs. In order to react to these

changing industry dynamics, firms will have to understand to distinguish drugs based on

product and process complexities.

Many issues are raised to understand pros and cons of outsourcing logistics

activities acknowledging that outsourcing decisions become complicated when

significant core activities have to be outsourced.

We conclude the thesis by stating that understanding business environment is an

essential first step in determining the value of logistics for a large pharmaceutical firm in

chapter 7. Business processes and tools are only selected when there is an understanding

on how a firm would like to compete based on its perception of the business environment.

2 Literature Review

An initial understanding of the pharmaceutical industry and the challenges that the

industry faces was gained by reviewing relevant Harvard business case studies written by

Bradley and Weber [4], Hayes and Fagan [19], Herzlinger [20], Rangan [43], and Wells

[53] and other industry-related articles written by Booth [5], and Mcgahan [31]. These

cases and articles provided a good description of the industry issues and expected trends.

These issues and trends will be highlighted in certain section of the thesis to augment the

discussion. The data and trends mentioned in the thesis come from these articles.

Bradley and Weber [4], Hayes and Fagan [19], and Wells [53] are associated with

the Harvard business school and they have similar convergence of opinions on future of

the pharmaceutical industry. In their case studies, they have discussed the latest major

trends driving the pharmaceutical industry as well as the relevant existing ones captured

in the pharmaceutical database at Harvard University. These authors highlight the

challenges faced by the top pharmaceutical firms with respect to the blockbuster business

model. According to them, the blockbuster business model will not yield significant cash

generation opportunities going forward as it did in the past. They attribute this to the fact

that the rate of innovation is declining in the chemically-synthesized compounds.

Profitability of the blockbuster business model is further negatively impacted due

to increasing competition from the generics and rapid introduction of fast-follower drugs

over the years. These authors also mention the increasing presence of the biologics in the

pharmaceutical space. However, they do not explore the impact of biologics on the

underlying industry structure and what role they will play in increasing the industry

profitability. This thesis largely accepts the trends and challenges mentioned in the case

15

studies by Bradley and Weber [4], Hayes and Fagan [19], and Wells [53], in the

traditional blockbuster model driven by chemically-synthesized compounds.

Herzlinger [20] systematically explains the challenges and opportunities facing

major groups involved in health care delivery. These major groups are: payers, hospitals,

physicians and other health services personnel, medical technology suppliers, and

patients. The case is presented from the point of view of New Sector Alliance, a non-

profit consulting firm that is trying to make an entry in the health care sector. As a part of

formulating strategy for New Sector Alliance, Herzlinger [20] provides elaborate list of

endnotes and bibliography discussing the current state of the health care industry.

Mcgahan [31] has written a case study on "Merck-Medco" acquisition to express

opinions on vertical integration attempts by the manufacturing firms to protect their cash

flows in the pharmaceutical domain. This case study is dated but it speaks loudly about

the pharmaceutical manufacturer's high level of concern vis-A-vis profitability.

The trends in the biologics technology domain are well discussed in the Harvard

business case study titled "The Life Sciences Revolution: A Technical Primer" 9-602-118

written by Gary Pisano. Biologics have a potential to create immense profit for

pharmaceutical firms provided technology development issues are fully resolved. Issues

related to the biologics supply chain are discussed in the articles written by Anderson and

Narus [1], Forcinio and Wright [15], Jarvis [22], Mullin [35], Palma [40], Vaczek [50],

and Williams [55].

Since biologics is an emerging domain in the pharmaceutical industry, there is

limited information available on this topic. Nevertheless, the influence of cold chains and

packaging was clear in the context of logistics. To this end, we recognize the strategic

value of establishing relationships with and managing cold chain partners along with the

importance of integrating and understanding packaging complexities during the product

development phase.

Anderson and Narus [1] provide insights on Monsanto's biologics supply chain.

This biologics supply chain shows why proprietary partnership will be required as

technology becomes personalized and there are fewer patients to cure. Although the

customized specialized supply chains add to the overall cost, they can offer competitive

advantage by creating another barrier to entry against manufacturers of bio-similars2. In

this manner, a pharmaceutical firm can increase the profitability lifespan of its biologic

drugs beyond the limits set by patent expiration as in the case of chemically-synthesized

drugs.

Issues related to chemically-synthesized supply chain are discussed in detail by

Danese [9], Kulp and Randall [23], Pisano and Rossi [41], Shah [46], Singh [49],

Wechsler [51], and West [54]. As it will be pointed out later, barriers to entry for the

branded chemically-synthesized compounds were lowered by the regulatory bodies due

to the free-rider concerns. We leverage the work done by Danese [9], Pisano and Rossi

[41] and West [54] to show why pharmaceutical firms are vigorously working in gaining

competitive advantage by improving availability and developing cost-optimized

structures for the chemically-synthesized supply chains.

It can be argued that going forward RFID and information technology will form

the backbone of the pharmaceutical industry. Following cases and articles were reviewed

to understand the role of technology in this industry better: Carr [8], Forcinio [13], Giggo

2 Bio-similar is the name given to a generic-version of biologics drug.

[16], Koroneous [25], McAfee [29], and McFarlan [32]. The issues mentioned in the

Cathay Pacific case by McFarlan [32] were explored and debated upon to show why

managing information technology is important. Specifically, this case study demonstrates

the importance of why information technology should enable and support the firm's

business strategy.

Various frameworks were used either to find the value of logistics or to find

applicability of these frameworks in providing value to the firms in the pharmaceutical

industry. These frameworks are given by Arrunada and Vazquez [2], Byrnes [6],

Davenport [10], Field [11], Fine [12], Graves [18], Lapide [27], Lee [28], Narayanan and

Raman [36], Porter [42], Rosenfield [44], and Simchi-Levi [48].

According to Byrnes [6], strategy is where the firm would like to aim and shoot.

Strategy depends on how a firm views its business environment and where it sees

profitability. He provides a framework of aligning supply chain drivers with business

strategy by exploring the concept of extended products, the role of supply chain in

account management, and choosing the right channel partners. Byrnes' framework can be

leveraged to erect higher entry barriers for biologics. Davenport [10] extends a

framework that describes how to align business strategy with enterprise resource

planning information systems.

Lee [28] discusses how various information technology models can be used to

provide a competitive advantage to firms by reducing bullwhip effects in the supply

chains. Narayanan & Raman [36] provide a framework for designing supply chain

control mechanisms from a systems-wide perspective and Simchi-Levi [48] shares a

framework on how to design and manage supply chains. This approach takes into account

understanding trade-offs that exist in the supply chain designs and how firms can make

structural changes in their supply chains to influence the trade-offs in their favor. Field

[11] sheds some light on how to manage outsourcing partners in case pharmaceutical

firms decide to outsource their supply chain.

Fine [12] and Rosenfield [44] provide frameworks for operations strategy where

the impact of outsourcing decisions is also investigated. Rosenfield [44] also suggests a

decision-based framework on evaluating important drivers that will enable proper design

of operations strategy.

3 Chemically-Synthesized Compounds

The business dynamics of chemically-synthesized compounds in the pharmaceutical

industry is effectively articulated in a series of Harvard business case studies written on

Eli Lily in the early 1990s (Pisano & Rossi [41] and West [54]). A unique feature of large

pharmaceutical companies is its heavy dependence on blockbuster, as mentioned earlier.

In fact the number of blockbusters in the pipeline is an important indicator of a

pharmaceutical company's financial viability in the future.

In 1992, Eli Lily was ranked 9th in the world and had a 2.5% market share;

however, it had no "blockbuster" products and the firm relied on therapeutic substitutes.

Eli Lily's Prozac was facing intense competition from other pharmaceuticals firms like

Pfizer's Zoloft and SmithKline Beecham's Paxil. During that time, Eli Lily decided to

focus on bringing new products to the market faster at lower cost.

Pisano and Rossi [41] state that due to reduced profit margin pressure, Lily's key

corporate objectives were to reduce development lead time by as much as 50% and to

reduce manufacturing cost by 25%. Some of the drivers, putting pressure on the margin,

were: decline in pricing flexibility; slowing down of innovation rate; competition within

therapeutic categories and generic substitutes. Fast follower drugs could now be designed

based on blockbusters more easily. As a result of these developments, market exclusivity

of a drug designed to recoup R&D investment had declined over the years.

3.1 The Role of Generics

According to the U.S. Food and Drug Administration, "A generic drug (pl. generic drugs,

short: generics) is identical, or bioequivalent to a brand name drug in dosage form, safety,

strength, route of administration, quality, performance characteristics and intended use."

Although generic drugs are chemically identical to their branded counterparts, they are

typically sold at substantial discounts from the branded price as the company

manufacturing the generics is not investing significant resources in R&D and marketing.

More importantly, the generics trend has become increasingly more dominant

over the years. And in addition, Hatch-Waxman Act, which is also referred to as the Drug

Price Competition and Patent Term Restoration Act of 1984, encourages the promotion

of generics in order to keep the drug prices under control.

Blockbusters now have to be discounted by up to 34% to attract market share

when they approach their patent expiry. Furthermore, demand tapers off in about the

twelfth year instead of full patent life because of the availability of generic and newer,

patented substitutes. As a result, maximization of cash flow is gaining importance as the

time to exploit new drugs commercially is becoming shorter. There is an excellent

understanding in the industry that "Time-To-Market", "Availability", and "Quality"

metrics are the most important competitive and performance improvement measures. In

various sections of the thesis, performance measures will be highlighted to show their

relative importance during the business & product lifecycle.

The generics market has more than doubled in size since 2001. In fact,

prescription drug expenditure rate slowed down in 2003 due to an increased use of less

expensive generic drugs, relatively lean new drug pipelines, and a slower growth of

disposable income. According to Herzlinger [20], "In 2003, generic drugs accounted for

54% of prescriptions filled, but a mere 9% of dollars spent on prescription drugs.

Standard & Poor's estimated a 20% growth rate for the generic drug market in 2005,

stimulated by the loss of patent protection of many branded drugs." The extent of the

generics threat can be estimated by considering the case of the cardiovascular drugs. It is

expected that all major cardiovascular drug classes will have intense generic competition

by 2009 and that $82 billion worth of global blockbusters will have patent expiration by

2007 (PriceWaterHouseCoopers 3).

In summary, generics competition has significantly changed the industry structure

and pharmaceutical firms must take this fact into account when designing chemically-

synthesized compound supply chains.

3.2 Logistics Flows

As the business model of highly profitable chemically-synthesized compounds employed

by the large pharmaceutical companies shifts to the low-cost model in line with the

drug's transition to its generic phase, logistics activities will have to become leaner and

flexible to ward off profit pressures from follow-on superior drugs and generics. Note

that the manufacturers of the generics drugs will naturally be cost focused and logistics

will play an integral role in their success. All pharmaceutical firms will have to shorten

the lead times and make the chemically-synthesized supply chains more responsive and

flexible to meet the demand in the most cost-effective way. Furthermore, these

improvements must be made without having significant impact on the throughput using

proper design & placement of inventory buffers.

According to Shah [46], the inventory performance metrics of the pharmaceutical

industry paint a very depressing picture:

3 Generic competition (http://www.pwc.com/extweb/industry.nsf/docid/004B5431685BIEEC852570A8007B5345)

22

* the stock levels in the whole chain ("pipeline stocks") typically amount to 30-

90% of annual demand in quantity;

* finished good stocks range from anywhere from 4-24 weeks worth of demand;

* stock turns (defined as annual sales/average stock) are typically between 1 and

8. Tablel shows the stock turns belonging to various large pharmaceutical

firms. As shown in the Table 1, large pharmaceutical firms have been able to

improve their stock turns beyond 8;

* supply chain cycle times (defined as elapsed time between material entering

as raw material and leaving as product) are often between 1K and 8K hours;

* the value-added time (time when something happens to material as a

percentage of chain cycle time) is of order 0.3-5%;

* material efficiencies (the amounts of product produced per unit amount of

total materials used) are 1-10%;

At the same time, these problems could be attributed to the unique challenges

faced by the pharmaceutical industry such as, uncertainty in demands for existing drugs

(marketing mix); uncertainty in the pipeline of new drugs; process development; capacity

planning; network design; plant design; and long lead times (100-300 days are common

for the overall supply chain time.)

Table 1 2006 Inventory Turns Ratios

3.3 Manufacturing Process

The manufacturing process in a large pharmaceutical firm can be divided into two main

categories: primary and secondary. Primary or bulk drug manufacturing category is

associated with the upstream task of producing active ingredient (AI) that uses batch

equipments, has long task processing time and high production volumes, long downtimes

between product changeovers, excessive inventory, and numerous quality checks.

Primary manufacturing activities are heavily focused on asset utilization and produce up

to a year's worth of active ingredient in one production run. Of late, primary

manufacturing sites are increasingly owned and operated by contract manufacturers.

Secondary manufacturing or fill and finish operations sites on the other hand are

designed to manufacture the end product in the SKU format. They tend to serve the local

and regional markets. The end product is dispatched every one or two weeks by ship or

by air for more frequent deliveries from the plant. A main consideration for the secondary

manufacturing site location is the exploitation of tax breaks and transfer pricing

opportunities. Driven by the short term and immediate gains, plant location decisions are

driven by tax implications, which take precedence over logistics issues. These decisions

are driven purely by financial considerations but result in potentially complicated supply

chains. Trade barriers along with issues arising out of different filling and finishing

specifications based on market present significant obstacles that make the manufacturing

and logistics function inefficient.

In many ways, the inefficiencies in the pharmaceutical supply chains are the result

of a poor interface between the primary and secondary manufacturing sites. The

emergence of new technology is helping us address this problem to certain extent as

shown in Figure 2. For example, Bristol-Myers Squibb is using software from

LogicTools 4 and Factory Physics Inc 5 to explore how to better manage the push-pull

boundary and reduce the overall safety stock in the system. Pfizer has also relied on

Tefen6 to bring operational excellence in its processes.

Medium and Long-term Forecas

Primary Manufacturing SiteI

Customer Dem and

Push Model

Figure 2 Inefficiencies Associated with Chemically-Synthesized Compounds

Interestingly, due to the unique nature of the primary and secondary

manufacturing activities, chemically-synthesized supply chains are well suited for the

application of modem planning concepts. For example, the idea of manufacturing

postponement concept to reduce inventory and costs while maintaining a high level of

product availability can be employed quite effectively in this situation. Since a majority

of the end consumer demand is either local or regional, secondary manufacturing phase

can be managed as a demand driven process, which pulls required supply from the

4 LogicTools, a Division of ILOG, is a strategic supply chain planning company

5 Factory Physics Inc, is a management consulting company that provides a scientific framework, software,

and training to optimize performance of manufacturing supply chains

6 Tefen, a management consulting company that designs and implements solutions which enhance

operational performance throughout an organization

t

primary manufacturing sites using various pull-based strategies. The primary

manufacturing sites will operate in the traditional manner using push-manufacturing

strategies.

3.4 Vendor Managed Inventory

Now, let us take a closer look at the vendor managed inventory (VMI) technique

currently being used for managing secondary manufacturing supply chains in the

pharmaceutical industry. VMI is a family of business models in which the buyer of a

product provides certain information to a supplier of that product and the supplier takes

full responsibility for maintaining an agreed inventory of the material, usually at the

buyer's consumption location (typically a store).

Glaxo Smith Kline (GSK) was using an EDI system to exchange replenishment

information with its partners in the early 90s. Despite having the EDI system, GSK faced

the limitations of not knowing the true levels of inventory in its supply network.

Furthermore, GSK lacked flexibility in responding to changing customer needs. The

limitations and frustrations of the system led GSK to implement VMI solution under the

project called Global Supply Chain in 1995.

According to Danese [9], GSK's VMI implementation extended both upstream

and downstream in the supply network allowing co-ordination of the material and

information flows among a number of different suppliers, manufacturing and distribution

plants ("extended VMI"). It was found during the study that information was being

shared both horizontally and vertically (horizontal communication implies the sharing of

information between customers and suppliers and vertical communication suggests

information flow from suppliers all the way to customers.)

26

The sharing of information within the GSK supply network allowed each actor to

understand a variety of key factors such as, level of performance among supply network

members; the causes behind certain results/events; and the ability of the supply network

to satisfy the end customers' requirements (e.g. by analyzing the stock out in the

distribution centers.) VMI implementation at GSK provided the firm with the following

benefits: minimization of bullwhip effect, reduction in inventory, improvement in service

levels, and ability to promise and deliver orders more effectively.

In general, the adoption VMI allows supplier/manufacturing plants to achieve a

certain level of flexibility in managing the delivery and production order priority, limit

inventory investment in manufacturing plants/distribution centers and improve the

customer service level, as their supplier has the ability to analyze and, in some cases,

satisfy new requirements even in the frozen period. VMI also opens door for a more

advanced technique called Collaborative, Planning, Forecasting and Replenishment

(CPFR). Additional advantages of VMI are that the demand can be managed in a more

reasonable way, frequency of stock outs can be reduced, along with greater flexibility in

production planning.

According to Simchi-Levi [48], the main challenges encountered during a VMI

implementation include the presence of conflicting goals among supply network

members; the reluctance of firms to share confidential data/information; and the need to

involve supply network members through an incentive system to avoid opportunistic

behaviors.

There is an acknowledgement within Pfizer that exploring the linkages between

logistics and manufacturing will improve the firm's competitive advantage. To this end,

efforts are now underway to formulate comprehensive performance metrics that will

measure how well various manufacturing and supply chain processes are interacting with

one another and how well these processes are aligned to the firm's overall objectives. For

example, fill rate metric will be used to link the performance of logistics with

manufacturing.

Additionally, Pfizer relies heavily on metrics that measure warehouse processes

and labor performances. The flows within the warehouse are largely segmented using

drug velocities. High velocity drugs are placed near the entrance so that they can be

received or shipped quickly. Six sigma and statistical process control techniques are

being used to improve and measure the process capabilities to remove waste from the

system.

3.5 Channel Management

Due to intense price pressures, all players in the pharmaceutical industry, namely payers,

hospitals, physicians and other health services personnel, and medical technology

suppliers act in their self-interest and drive industry structure changes to maximize their

profit margins. For example, as Miller [34] states, the relationship between

pharmaceutical firms and wholesalers is changing. Previously, wholesalers bought drugs

at a cheap price and then sold them when prices increased. This model is commonly

referred to as the 'buy-and-hold' model, which encouraged inefficient supply chain

practices.

But recent changes in the environment have prompted the manufacturers to

initiate drastic restructuring of this model. For instance, Merck announced that it would

take $700 million revenue hit in the fourth quarter of 2003 to reduce the amount of

28

product inventory in its downstream supply chain and moderate the fluctuations in sales

currently caused by wholesaler's opportunistic buying practices.

In the new 'fee-for-service' inventory management model, wholesalers will

receive fees only for providing specific services. This model eliminates the quick wind-

fall gains enjoyed by the wholesalers by timing the opportunistic purchase and sale of

drugs. Indeed, services such as handling drugs that require maintenance of a cold chain or

controlled substances requiring extra security will attract a premium and constitute a

major source of income for the wholesaler going forward. Singh [49] has also

investigated the impact of other mechanisms such as Inventory Management Agreements

(IMAs) on the future of manufacturer and wholesaler relationships.

Availability, however, is the ultimate concern for a pharmaceutical company.

Herzlinger [20] points out that pharmaceutical firms stand to loose up to $800,000 a day

in lost sales for a niche medication and as much as $5.4 million per day for a blockbuster.

Firms can recoup some of the revenue lost once a drug hits the market but can put

millions of dollars at risk if a competitor catches up or gains competitive advantage with

an earlier launch. Thus, availability is a major challenge in the early and middle phases of

the branded drug life cycle. Therefore, wholesalers can benefit monetarily by providing

extremely high availability services to these drugs.

Of late, maintaining custody and pedigree (referred to as e-pedigree) of a drug has

gained significant importance in terms of securing and managing integrity of the

pharmaceutical supply chains. Although patients and the government are negatively

affected by the introduction of potentially dangerous and fake drugs into the supply chain,

most of the financial burden falls on the manufacturers in terms of recalls and tarnished

brand images. Being a key player in managing the movement of drugs, the wholesalers

are expected to play an important role in securing supply chains to fulfill this stringent

requirement.

In addition to all the changes and challenges mentioned above, the impact of mail

service pharmacies on channel relationships needs to be further investigated. Generally,

this channel is suited for drug re-fills but lower cost of drugs in this channel might also

lead to higher patient preference even for other drug segments. In many ways, mail

service pharmacies are well suited for generics businesses. The shifting focus of channel

relationships during various life cycle phases of chemically-synthesized compounds is

shown in the Figure 3.

Sales Volumeof the BrandedDrug

Channel Relationship Focus

Figure 3 The Logistics Performance Measures Associated with the Drug Lifecycle

4 Biologics

There has been a lot of skepticism regarding the end of the blockbuster era in the

literature and press. Various authors cite that for industry leaders to maintain historical

growth rates, they would have to introduce between one and three blockbusters each year.

At the same time, they talk about the emergence of biotechnology as a new field, which

can serve therapeutic categories such as cancer and central nervous system disorders in

fundamentally different manner, opening up new market opportunities in the bargain.

4.1 Biologics Market Trends

Currently, biologics have a smaller share of the market vis-a-vis chemically-synthesized

drug category. The biologics revolution is still in its infancy and early stages of the

learning curve. For now the drugs are targeting expensive and niche therapeutic markets.

Wells [53] states, "By 2005, there were 1,444 biotechnology firms in the U.S., 330 of

which were publicly held. Revenues increased from $8 billion in 1992 to $46 billion in

2004, and more than 320 drugs and vaccines had been developed. The industry employed

187,500 people at the end of 2004." Clearly, the sector is growing rapidly and accounts

for about 27% of the global drug development pipeline.

Jarvis [22] discusses the steady expansion of Pfizer in the biopharmaceuticals

space in recent years. Pfizer expects its marketed biologic products, which are

predominantly recombinant protein-based drugs, to generate $1.5 billion in revenues this

year, and the firm believes it can triple this figure by 2010. "We will continue to invest

heavily both internally and externally and look at potential acquisitions to build on the

strong foundation that we have created," says Martin Mackay, Pfizer's senior vice

president for worldwide research and technologies.

Pfizer differentiates its supply chain based on high & low velocity drugs. At the

Pfizer's Parsippany logistics center New Jersey, there is a low-velocity refrigerated drug

that has a potential to become a high-velocity drug in the future. It was stated that fewer

resources have been currently assigned to the drug; however, in future the drug may

require unique process flows and warehouse engineering skills as its velocity increases.

Therefore, traditional pharmaceutical firms like Pfizer will also have to re-orient their

supply chains to meet the logistics needs of biologics drugs.

There are no specific guidelines from the FDA for follow-on biologic drugs (bio-

generics or bio-similars) entering the market. Being different from the chemically-

synthesized drug, the quality standards for biologics cannot be established easily for

follow-on drugs. This is one reason why biologics are harder to copy. Also, it has been

anticipated that follow-on biologics drugs can be priced only up to 25% below the

innovator's price due to high production costs and the complex processes required

manufacturing the drugs.

Recently, Sandoz's Omnitrope and Biopartners' Valtropin became the first bio-

similar. Sandoz's Omnitrope was developed using Pfizer's Genotropin as the reference

medicine. It is interesting to note that before the US FDA approved Sandoz's Omnitrope,

Genentech, Pfizer, and the Biotechnology Industrial Organization submitted citizen

petitions to the FDA regarding the need for full-blown clinical trials to maintain the

safety and efficacy of these drugs. The complexity of these drugs was stated as a reason.

Indeed, the biotechnology industry and large pharmaceutical firms are interested

in protecting their profit margins by creating as many new barriers to entry for bio-similar

firms as possible. At the same time, it should be noted that the pressure to introduce laws

for reducing entry barrier for bio-similars is also quite high given the back breaking cost

of healthcare in the United States.

4.2 Biologics Product Characteristics and its Unique Requirements

Needless to say, as the biologics sector matures, it will produce better quality drugs that

are less hazardous and toxic to humans, have significantly lower side effects, and have

faster recovery times. How it is going to happen needs to be seen as biologic product

technology is inherently complex, degenerates quickly, and has a shorter life span. One of

the many implications of these nuances is resulting complex handling requirements,

which have significant affect on the biologics supply chain design.

To understand the complexities associated with biologics better, Stamatellos [45]

illustrated a supply chain management example in the establishment of a global

distribution process for a bio-engineered 5-day shelf life product. Novartis Pharma AG

had partnered with a local startup in Cambridge, Massachusetts to supply skin grafts to

patients around the world. Some of the challenges were how to forecast the demand for

the organ, what kind of special packaging is needed to nourish the organ that could live

only for five days from the time it was manufactured, and how to ship the organ without

delaying it and making sure that the organ is with the physician when needed.

To meet these challenges, the logistics department partnered with air delivery &

freight services firms such as FedEx Corporation. Novartis developed a special packaging

technology to provide the continuous nourishment to the organ as it was being

33

transported and utilized the tracking capabilities of FedEx to know the exact location of

the organ at any given time. The emphasis was on ensuring that precautions and

instructions were followed reliably to ensure that organ reached the end customer in the

promised state.

Furthermore, Novartis logistics team worked seamlessly with the sales force that

was trained to work closely with the physicians ordering the organs. The redesigned

supply chain that leveraged the close interaction between the sales personnel and the

physicians enjoyed 99.97% forecast accuracy for the organs.

In the future, it is likely that biologics will lead to the development of 'designer

drugs' that can address unique needs of an individual based on his or her gene profile or

for a group belonging to a certain demographic profile living in different geographic

locations or countries. Consequently, it will be a challenge as well as an opportunity for

pharmaceutical firms to service these discrete and smaller sets of patients but it will

require an increasingly sophisticated supply chain function to meet the new challenges.

Monsanto's Animal Agriculture Business (MAAB) developed an innovative

modular channel to highlight the importance of selecting channel partners with

appropriate capabilities. In 1993, MAAB came up with the first rBGH drug called

"POSILAC" that increased milk production of dairy cows. MAAB developed the channel

for "POSILAC" using a network of third-party information technology, logistics, and

cash management suppliers.

The customers of rBGH were 130,000 active dairy farmers spread across the

United States. MAAB hired Marketing Technologies International Inc. (MTI) to design

and develop AGLIFE database on these farmers as well as hired Geile-Rexford, an

advertising agency to create and mail a launch kit, featuring a video and collateral

material, to the prospective farmers. FedEx logistics services (FLS) built an integrated

logistics system to support this project and flew the POSILAC in bulk containers to its

Memphis hub and stored it in the refrigerated warehouse. With the help of the new

system, the FLS employees could assemble an order and ship it to the dairy barns

belonging to the farmers in a very short amount of time.

To complete the cycle, Browning Ferris Industries (BFI) gathered, and recycled

used syringes while Moore Business Forms issued monthly statements to dairy farmers

concerning their POSILAC usage. Furthermore, to promote sales, Bank of America

extended financing to help farmers buy the new drugs. As a result, by 2001, POSILAC

was the largest-selling dairy animal pharmaceutical in the United States.

The above two cases highlight the complexities involved in both the product and

process technologies in developing and marketing biologics. The complexities might lead

to the emergence of niche logistics players who will provide unique services to biologics

manufacturers enabling their supply chains. Furthermore, consider a drug that is priced at

$30,000 per annual treatment and has only 16,667 customers, the annual revenue for the

drug is approximately $500 million dollars, but the small number of customers will most

likely be located all around the world. In order for the drug to reach its potential

customers in the time-sensitive period, a pharmaceutical firm will have to rely on the

niche logistics players or build sophisticated supply chain capabilities.

Obviously, targeted potent drug molecules in the future will require much smaller

dosage. As a result, their production volumes will be relatively low compared to the

current drugs; however, more manufacturing capacity per output unit will be needed due

to the manufacturing difficulties associated with these new drugs. It is anticipated that in

the future, it will be costly to keep finished goods inventory because these drugs are high-

value added and expensive to handle. Therefore, managing inventory for biologics is

expected to become more challenging year by year.

In summary, both the production cost and quality control requirements are high

for biologics compared to chemically-synthesized compounds. Thus, biologics cannot be

easily copied and it becomes essential for the innovator firms to protect both product and

process intellectual properties. By doing so, pharmaceutical firms might be able to delay

the entry of bio-similars.

4.2.1 Cold Chains

Biologics are highly temperature sensitive. If these drugs are not kept in the required

temperature controlled storage conditions, the strength, purity, quality, and efficacy of the

drugs will suffer. It is interesting to note that FDA considers temperature abuse in its

definition of adulterated product. Therefore, pharmaceutical firms will have to take into

account of making sure that biologics are maintained under appropriate temperature

conditions even while in transit. Moving pallets of several cubic meters within the 2-8 C

window poses a significant challenge to the logistics function. The logistical nightmare

has given rise to new breed of logistics firms that specialize in moving highly unstable

products at low temperatures. Logistics managers will now have to contend with

reductions in potency due to temperature excursions. Airport delays are the biggest cause

for biologics damage due to temperature excursions.

According to the current trends in the biotechnology sector, the growth in

temperature-sensitive products will outpace the rest of the industry with average growth

36

estimated at 15% per year. Nearly 70% of the biotechnology drugs approved in the last

six years can be classified as temperature sensitive. In 2003, biologics accounted for

approximately 10% of $400 billion of pharmaceuticals and biotech products grew at a

rate twice that of small-molecule drugs between 1999 and 2003.

According to Vaczek [50], FedEx Custom Critical Inc. (Akron OH) offers its

temp-assure validated ground services employing thermal-mapped vehicles equipped

with NIST-traceable recording devices. The Custom Critical shipping tool kit provides

online shipment monitoring with temperature updates every 30 minutes. With the Temp-

Assure Validated Air service, U.S. and overseas freight is transported in temperature-

controlled vehicles by FedEx airlift.

More importantly, logistics will now have to align with R&D during the early

phases of drug development to understand the stability issues and how to deal with them.

The cold chain will force pharmaceutical firms to view the supply chain holistically and

how to manage and run it.

As a result of the criticality of the cold chain in moving biologics, pharmaceutical

firms will have to be extremely careful in choosing their cold chain transport partners.

Considering the product and process complexities, the relationships with the channel

partners will have to be both strategic and proprietary. New information technologies are

bound to play an important role in enabling these relationships.

4.2.2 Packaging

Another important aspect of protecting the stability of biologics during the duration of its

shelf life is packaging. There are only a few articles written on the role of packaging in

the biologics supply chain and that too during the past couple of years. This suggests that

37

packaging is slowly but surely gaining recognition as an important part of the design of

biologics products.

Williams [55] highlights the importance of packaging in the pharmaceutical

industry. According to him, the partnership between pharmaceutical firms and the

packaging firms should be treated as significant for maximizing security while reducing

costs.

To be sure, biologics are increasing the need and complexity of packaging

technology as foreign substances emitted by packaging technology can affect the

sensitivity of many biological drugs. According to federal regulation, packaging firms

now have to ensure drug integrity throughout its complex supply chain.

Forcinio and Wright [15] state that managing cold chain appropriately can

increase supply chain efficiency and reduce costs. RFID can play an important role here.

At the time of writing, the authors state that no federal regulations define cold-chain

packaging standards. Sensitech, Beverly, MA (www.sensitech.com) is working on

technologies related to cold chains using RFID technology.

Specifically, Sensitech is aiming to develop a solution that will record

temperature and humidity at specified intervals and wirelessly download the data to a

web-accessible database. As a result, actions can be taken proactively if temperature

breach is noticed; thereby addressing the root-cause and preventing further damage to the

drug. Sensitech's marketing director, Henry Ames illustrated this problem by sharing the

case where "an entire shipment of biologics was frozen, causing an $8-million loss."

Thus, RF-generated information can help logistics managers to save on coolant and

attendant dead-weight shipping costs. These costs savings are attributed to matching

packaging capabilities to the shipment conditions.

4.3 Channel Management

Cantow and Strauss [7] state that Boston Scientific prefers to ship its medical instruments

directly from its distribution center to the end-users or doctors. The reason behind this

practice is that the product innovativeness requires a specialized sales force that has to

communicate and work very closely with the doctors. Customer contact is essential for

making a sale and maintaining high market share in the medical device industry. Thus, a

lot of customer contact is lost if the product flows through distribution centers and

warehouses that are not owned by Boston Scientific.

One of the key learning of our research so far is the heavy influence of product

technology on the design of logistics flows in the pharmaceutical industry. Extending this

argument into the future, we can conclude that the future supply chains will be very

different from today mainly on account of the highly complex products in the future.

As a result, firms will have to be careful in terms of which activities they can

outsource. It can be argued that strategic planning activities will have to be retained

within the firms. The industry segment is dependent on protecting its intellectual property

to raise the entry barriers against the generics. Having a direct impact on the performance

of the drugs, biologics supply chains will seek innovative solutions using latest

technologies.

5 Additional Considerations

We now turn our attention to several other factors that are important to recognize the

value of logistics for a pharmaceutical firm.

5.1 Compliance

FDA strictly enforces regulations to prevent errors as the drugs move downstream in the

supply chain. According to Neway [38], FDA initiated systems-based inspections

enforcement in 2002 to this end and issued many citations regarding quality, production,

& laboratory systems. The reason for the citations was the manufacturing inefficiencies

that affect various pharmaceutical firms.

5.1.1 Process and Analytical Technology

There is a general perception in the industry that pharmaceutical firms have relied on

standalone applications that were designed with a silo mindset. Some people say that in

order to counter the mindset, the FDA introduced Process Analytical Technology (PAT)

initiative. According to the FDA website, PAT is a system for designing, analyzing, and

controlling manufacturing of critical quality and performance attributes of raw and in-

process materials and processes with the goal of ensuring final product quality.

Pharmaceutical firms will require new information systems to process large

amount of data and convert it into meaningful information to satisfy PAT requirements.

According to Neway [38], "The lack of timely, cost-effective data availability with

connectivity to the point of use may be the single largest hurdle to compliance and

operating efficiencies in pharmaceutical manufacturing today." It might be worth noting

that GlaxoSmithKline was the first firm that worked with FDA to incorporate process

analytical technology initiative.

In order to comply with the FDA regulations, pharmaceutical firms will have to

improve the tracking and tracing capabilities of drugs, monitor stock levels, avoid out-of-

stock situations, automate reordering and inventory counting, and minimize

counterfeiting. Thus, cycle time reduction goals have gained significant importance in the

industry.

5.1.2 Managing Compliance

Compliance in a pharmaceutical industry is both mandatory and necessary to stay in the

business.

There are perhaps two options for pharmaceutical firms to deal with compliance

issues that improve quality and reduce costs concurrently. In the first option,

pharmaceutical firms can modularize their compliance activities and outsource certain

segments to specific partners. This type of outsourcing arrangement can help a company

leverage scale advantages, and thereby lower costs of managing and maintaining

compliance activities. In the second option, pharmaceutical firms will have to develop

innovative processes that will enable them to reduce costs while maintaining quality in

compliance activities. Both these options might be feasible; nevertheless, pharmaceutical

firms will have to judiciously decide on which option fits best based on intellectual

property issues and the current business environment.

5.2 Security

According to Wechsler [52], "Some counterfeit versions of Procrit (epoetin) contained

non-sterile tap water that can cause blood stream infections." In 2002, counterfeiters

substituted insulin for Eli Lilly's (Indianapolis, IN) injectable drug Zyprexa (olanzapine).

A counterfeit version of Serono's (Rockland, MA) had no active ingredient at all. Pfizer

(New York, NY) recently warned pharmacists of a widespread distribution of

unauthorized Lipitor (atorvastatin calcium) tablets that patients found to have a bitter

taste. "FDA notes that Chinese counterfeiting of some drugs may be as high as 50%, and

estimates are about 40% for fake pharmaceuticals in Argentina, Columbia, and Mexico."

Some of FDA's enforcement actions resulted in following fines: TAP pharmaceuticals

($879 million settlement for violations of PDMA); Schering Plough ($500 million for

failure to comply with good manufacturing practices); AstraZeneca ($355 million for

healthcare fraud).

These examples illustrate the importance of securing pharmaceutical supply

chains. In fact, security has become a critical requirement in the industry. However, it is

not a source of competitive advantage. The pharmaceutical industry along with the FDA

will benefit by collaborating and developing the framework that will enable highly

secured supply chains.

Securing pharmaceutical supply chains involves actions at the item level, case

level, and pallet level. There are two approaches to secure supply chains using covert and

overt technologies. The covert concept hides the form of security by using security

markers or taggants on drug coatings and the packaging material. Latest technology to

prevent counterfeit drugs comes in the form of taggant solution. Taggants are made of

food grade materials that can be incorporated into the packaging as adhesive, coating on a

label, or on the cap. Taggant code is read using a micro-imaging reader and software,

which allows authentication at the pill level. Many high-tech firms have emerged in this

space and are trying to develop new technologies using innovative ideas. The overt form

of technology tries to secure supply chains using visible markers like holograms and

color-shifting ink.

FDA uses carrot and stick policies to manage security. FDA would like to see the

use of RFID in tracking the pedigree of a drug. While at the same time, FDA has decided

that it is up to the industry, professional societies, and voluntary standards organizations

to fill in the details of the path ahead.

In the present scenario, RFID Tags are expensive and they are currently used

where the biggest value is. Nevertheless, RFID tags enable tracking the pedigree of a

drug from creation to purchase much more easily than what can be achieved using the

paperwork. Currently, major pharmaceutical firms are planning to ship high-risk drugs

using RFID. This action will lead to securing high value cash flows.

5.3 The Role of RFID

A key emerging role of RFID is to secure pharmaceutical supply chains and to execute

compliance policies. RFID microchips that contain product code are embedded into the

package so that the product can be tracked along the entire supply chain. To further

enhance the value of RFID, the pharmaceutical firms can borrow application ideas from

other industries. For example, Kimberly Clark hopes to achieve the following using

RFID: visibility up to the shelf inventory, improved forecast, and serialization of data to

resolve shipping/receiving discrepancies. RFID can also enable better management of

43

drugs recalls, item level traceability, channel management, cost data collection, and

management of charge backs and rebates.

But before deciding in favor of RFID, pharmaceutical firms will have to prove

that radio frequencies don't degrade the efficacy, purity, or safety of sensitive biologics.

Also, the onus falls on the pharmaceutical drug manufacturers to manage encryption of

the RFID tags using private keys and avoid imposing additional resource constraint on

supply chain organizations of these firms.

Additionally, the RFID technology has had some technical challenges in terms of

product and process deployment. However, the ultimate evolution of the RFID

technology will be in the service space. Here, RFID can be used as a source of

differentiator allowing strategies that will produce new value and enable new business

practices. An integrated RFID technology solution will enable synchronization of

marketing, supply chain, and technology policies. Thus, firms will have the flexibility to

meet varying customer needs.

5.4 The Role of Information Technology

According to McFarlan and Delacey [33], the merger of Pfizer with Pharmacia in 2003

led to the following priorities for IT: consolidation of data centers, combining of

networks, and choosing of applications. Thus, ITLT group was created to support this

mission. Some of the challenges that the group experienced were: the product pipeline

carried the ever-present risk associated with the development of new drugs, but risks also

existed for established drugs. What would happen in future when Lipitor went off patent?

If revenues were to fall rapidly, as they do when drugs go off patent, what would happen

to IT capabilities relying on a larger revenue base? The ITLT served as a template for

44

how Pfizer organized IT activities across business groups. With the addition of

Pharmacia, and the resulting increase in firm size and differenced in IT processes and

systems, it was not clear if the ITLT model for organizing IT would continue to be

effective.

The outcomes highlight the complexity of the work that is required to develop IT

strategy for a firm of Pfizer's size. McAfee and Reavis [29] state that the pharmaceutical

firms' top challenges in implementing e-commerce were: difficulty connecting to

partners, lack of corporate support and strategy, security authentication concerns,

difficulty finding IT resources, expensive technology, and difficulty connecting to

installed systems. There are also certain challenges such as disparate regulations

regarding the manufacture and sales of pharmaceuticals, significant differences in the

costs of pharmaceuticals, and different ways in which cultures treat ailments.

At the same time, there are signs that pharmaceutical firms are recognizing the

importance of centralization of information systems. The centralized strategy reflects the

importance of control & co-ordination, and cost effectiveness of the pharmaceutical

operations. This is especially true for chemically-synthesized supply chains. For example,

in December 1999, Novartis moved away from internally developed e-procurement

system to an Ariba e-procurement system when the firm recognized the need for a global

system. Novartis also revamped its ERP system to make it globally compatible. It had 60

separate ERP systems that ran SSA software to fit the various needs of CSOs and plants.

There was a general consensus amongst the management team of Novartis that a single

interface is needed for customers. Novartis chose SAP that would comprise seven data

centers. The guiding principles for e-business strategy at Novartis were: greater focus on

implementation; importance of speed of execution; prioritization of areas where most

impact can be made; respect and recognition of different market needs and resource

levels; global is good, but local delivers fast results; and integrate and do not become

isolated.

Following case study illustrates the importance of the role of information

technology in a corporate setup and to understand the impact of IT decisions on business

strategy.

5.4.1 Cathay Pacific Case Study

A. CENTRAL BUSINESS and I.S. ISSUE (S)

At the time when the case was written in 2002, the global airline industry incurred a $9

billion loss.

Some of the issues facing Yeung, the CIO of Cathay were: How should Cathay

direct its IT expenditure and in what other ways could savings be achieved? What were

the threats posed by "no-frills" airlines in the future compared to "long-haul" airlines?

How should Cathay increase the return on investment? IBM benefited immensely from

the smartsourcing alliance as it got access to Cathay's talented employee pool and was

making similar deals with other Asian airlines. Thus, the smartsourcing deal that Cathay

initiated certainly had limitations. What were the lessons learnt? What can be done to

mitigate the shortcomings of smartsourcing? How will long term IT strategic decision

impact two hundred systems delivery employees who had supported in-house legacy

applications? What should Cathay do with 3,200 out-port workstations? Should Cathay

outsource its entire IT operation? How should Cathay manage its vendors? How should

Cathay manage its outsourcing process? What are the threats of outsourcing? Can Cathay

utilize talented pool of IT engineers from China?

B. ALTERNATIVES/OPTIONS/RECOMMENDATIONS/IMPLEMENTATION

It was essential that Cathay strengthened its strategic position in the marketplace. The

"no- frills" airlines were not really a threat since it fits well for domestic short-haul point-

to-point travel, however, for a long-haul international travel, brand image, track record,

on-time service, safety, and quality of service provided are important parameters.

In general, information technology enables business strategy and either generates

high revenue or reduce operating costs. Simply put, information technology should act as

a bridge between customer expectations and services provided. The goal should be to

increase desirability amongst passengers to choose Cathay, and as the passenger volume

increases, Cathay will see benefits of scale in terms of reduced unitized costs. Thus,

Cathay can develop cost advantage over its rivals and it can also satisfy its strategy of

offering premium products while keeping costs low.

In order to support its information technology objectives, Cathay can keep its

existing systems workforce to develop and maintain its customized applications. This will

allow Cathay to own the proprietary technology, which will support its strategic

objectives and internal activities. However, the IT team might not be able to meet

corporate objectives due to lack of quality resource availability and engineering

inefficiencies. Delays incurred in developing applications besides lack of innovation in

the design team may lead to inferior products compared to the off-the-shelf technologies.

Other options include relinquishing some control of development activities by

having relationships with firms that have superior capabilities in developing information

technology applications. These relationships can be in the form of: a transaction

relationship; a co-sourcing alliance; and an enterprise partnership.

A transaction relationship works best if the firm out-sources its well-defined and

repeatable activities to a vendor who can perform the activities better. This can reduce

costs, yet maintaining or increasing quality. Cathay was already having a transaction

relationship with IBM when it outsourced its data center. Disadvantages of a transaction

relationship are that if service levels and penalties for non-performance are not well

defined, Cathay will have to bear the risks of accountability and ownership of the

outcome. Generally, initial momentum and excitement wanes after 3 years and the

relationship often deteriorates into us vs. them mentality.

Using a co-sourcing alliance, Cathay can leverage strengths of a business process

of its co-sourcing partner to achieve strategic objectives. In this model, another firm will

help Cathay extend its own brand capabilities, often in ways that are not built on

customer-facing processes but on "back office" and "administrative processes". Here

both the co-sourcing alliance partner and Cathay will be responsible for meeting the goals

and operational metrics. A co-sourcing alliance will suit Cathay if it is lacking

capabilities to develop certain processes that are critical in meeting its strategic objectives.

However, teamwork and collaboration between two organizations is challenging. In

addition, risk is involved when the co-sourcing partner implements the same solution for

a competitor and learns from the innovator's experience.

The prime motive of an enterprise partnership model is that Cathay will get cost

savings and better services. The partnership will be owned jointly by Cathay and its

technology-supplier. Project outcomes are certainly unknown, thus, the supplier also

bears the risks. Advantages of an enterprise partnership are: infusion of external energy

and capabilities; clear indication that management is committed to transformation;

upfront investment made by supplier. Cathay will bear less risk than the supplier because

Cathay receives guaranteed rewards, even if the supplier has to deliver the rewards at the

expense of its own profitability. Disadvantages of an enterprise partnership are: supplier

becomes responsible for management and operations of the new entity; the enterprise

partnership approach creates a clash of cultures; supplier's technology does not guarantee

competitiveness in the open market; enterprise partnership does not perfectly align with

the incentives.

6 Analysis

The framework shown in Figure 4 presents the pharmaceutical industry dynamics and

identifies important drivers that are either affected or will be affected by the supply chain

& logistics decision categories. A firm's decision categories directly impact the

competitiveness and performance measures. Typically decisions are made based on how

the firm views its short-term and long-term external and internal environments that are

represented by the product & business lifecycle. Thus, by understanding the product and

business lifecycle, the firm can decide on how to influence its competitiveness and

performance measures by making appropriate decisions.

Decision Categories Product & Business Lifecycle*Business processes *External environment: Govt.*Channel Management regulations & Law*Information Technology *Financial flows*Supply Chain & Materials Flow *Globalization*Vertical Integration & Supplier -Marketing and R&D Strategy

RA t., ..IIOI•a I eI I IL

Modes of Competitionl

Measures of Performance

*Cost-Quality*Innovativeness & Features-Availability*Environment performance

Figure 4 The Framework to Find the Value of Logistics in the Pharmaceutical Industry

In the following sections we will bring together findings from previous chapters

to create scenarios that will demonstrate the value of logistics for a large pharmaceutical

firm.

6.1 The Pharmaceutical Industry Dynamics & its Impact on Logistics

Design

It is well documented that the dynamics of the pharmaceutical industry is changing. The

competitive forces that the industry has experienced in the past and expected to be

present in near and mid term future are discussed below. We also highlight some of the

key dynamics that have the potential to change the industry structure in the long run.

Let us take a closer look at the causal loop diagram presented in Figure 5. From

the figure it can be observed that a key determinant of the future health scenario will be

the ageing of the population of the developed world. One of the critical aspects of ageing

will be the likely increase in the infection rate or the disease susceptibility of the

population. As a result, there will be a corresponding increase in the number of people

requiring health care, which will have a spiraling effect on the overall health care cost.

ericttition

Mre

Contact

+dustryDelInustry Deniund

Figure 5 The Pharmaceutical Industry Dynamics

This development will have a direct financial impact on the pharmaceutical

companies. On the one hand, opportunities to develop and sell more drugs will present

themselves to the pharmaceutical companies, on the other hand, the Government and

health care providers will face increasing pressure to take steps to lower health care costs.

This problem will be exacerbated by the competitive pressure exerted by an increasing

number of generics entering the market place due to the patent expiration of a large

number of blockbuster drugs and slower rate of innovation especially for the chemically-

synthesized compounds. Section 3.1 discussed how generics are changing the industry

structure and why chemically-synthesized supply chain needs to be more responsive and

flexible to the demand.

In the current business model, innovative technology is the main driver of

industry growth. New innovative technology tends to cure complex diseases or improve

the quality of life in terms of faster recovery, less adverse side effects, and thereby

preventing costly hospital stays. These benefits of the innovative drugs motivate doctors

to prescribe them to the patients. Media reports and advertisements further fuel the

popularity of these drugs. The increased revenues act as a fuel for further research and

development that result in a larger number of innovative drugs by kicking in a virtuous

cycle.

The growth loops (R1, R2, R3, R4) supported by R&D are being actively

counteracted by the balancing loop (B4) to reduce prices. Thus, the business dynamics

pose significant profit challenges for large pharmaceutical firms due to increased price-

reduction pressures from the government bodies, health-care organizations, and

competition from generics.

Additionally, different diseases have different footprint in terms of target

population sizes. For example, some diseases affect fewer people and are labeled rare.

Indeed the technology to cure rare (and often life-threatening diseases) is typically more

complex requiring complex manufacturing processes. In a peculiar way, the mix of

product and process complexities provides significant competitive advantages to an

existing player and high barriers to entry for new firms in terms of technology, highly-

skilled resources, complex processes capabilities, and high manufacturing costs. Section

4.1 explained how biologics as an emerging technology might create entry barriers and

protect profit margins.

This interaction between price and population is captured in the model shown in

Figure 6 where the size of the population affected has direct relationship with drug prices.

According to this proposition, diseases that affect a large population base will eventually

result in cost-optimized structures. These cost-optimized structures will be based on

leveraging the benefits associated with scale such as risk pooling, outsourcing etc.

Sections 3.2, 3.3, and 3.4 discussed the postponement strategy that can reduce inventory

and costs in the chemically-synthesized supply chains along with the improvement

opportunities at the push-pull boundaries.

DrugPrice

rol

Patient PopulationFigure 6 The Drug Prices vs. Patient Population

Whereas diseases that affect smaller patient populations will require flexibility,

proprietary relationships with niche players, and the innovative use of technology

resulting in higher cost. Section 4.2 presented in greater details the impact of biologics

complexity and its instability leading into the discussion around cold chains and

packaging. Biologics products will require expertise in understanding and managing cold

k

chains. Also, packaging expertise is essential in handling biologics' product and process

complexities.

Let us now turn our attention to the impact of above-mentioned business

dynamics and economic model on supply chain & logistics function. This analysis is

captured in Figure 7. As mentioned earlier, complex technology will cost more and

provide adequate barriers to entry unless the industry structure changes. The complex

technology will require proprietary supply chains that should be able to move highly

unstable and complex drugs in the shortest period of time to fewer patients.

TechnologyNeeded toCure Patients

Price

Figure 7 Expected Future Trends in Supply Chain Design

In order to support unique requirements, complex supply chains will be

characterized by proprietary partnerships, which will require both trust and information

sharing. For example, it might be possible to decipher or predict the drug quality by

knowing the temperature patterns of drug as it makes its way to the patient in the cold

Therapeutic Classes that:-Have complex products &processes*Have high barriers to entry-Have fewer patients

Therapeutic classes that:-Are occupied by Generics-Have slow rate ofInnovation-Face intense PricePressure

L

chain. The drug stability requirements are likely to result in supply chain design

innovations.

In other words, to be effective, biologics supply chain and logistics design

decisions will have to interface with R&D decisions to create new business models and

processes. Needless to say, information technology will become important in providing

appropriate capabilities to bring about the requisite structural changes within the supply

chain as proposed by Lee [28]. Section 4.3 explored the possibility of development of

proprietary relationships with niche service providers to achieve high entry barriers and

capability requirements.

At the same time, many therapeutic classes addressing chronic illnesses will be

satisfied by the generics. Fewer blockbuster drugs will be introduced due to the fact that

generics are able to satisfy the needs of curing ailments sufficiently, and also due to price

pressures experienced in those therapeutic classes from regulatory bodies and HMOs. For

these kinds of therapeutic classes, supply chain designs will be cost-oriented. Thus,

supply chains will be designed for availability during their blockbuster phases and then

transition to a cost focus to compete against lower cost structures belonging to generics

that often flood the market as branded drugs go off patent. Section 3.5 discussed the

channel relationships for chemically-synthesized compounds.

6.2 Outsourcing of Logistics Activities

Blumberg and Lacey [3] state that Japan's largest pharmaceutical firm Takeda

pharmaceutical outsourced its highly efficient logistics infrastructure of its U.S.

subsidiary to its key business partners. Now, the operations are managed using electronic

communication with networked suppliers. The firm claims that the new structure has

56

delivered benefits such as speed, quality, flexibility, insulation from business interruption,

and cost efficiency. Buoyed by this success, TPNA has expanded the concept to include

packaging, distribution, and warehousing functions as well. According to Chuck Whitmer,

TPNA vice-president (Business Operations), "Capital saved by outsourcing can be re-

channeled to R&D to support new compound development, which could improve the

overall level of healthcare."

An outsourcing decision is primarily motivated by cost-reduction benefits in most

cases. But it can be argued that cost reduction can also be achieved in many other ways

by a firm such as effective management of activities, alignment of objectives, and

redesign of processes. If pharmaceutical firms decide to retain ownership of their supply

chain activities, then they have to make sure that they posses right resources and

capabilities for designing and managing effective supply chains.

Before considering outsourcing of logistics function as an option, firms must

answer the following questions in the short-term: do they have appropriate processes and

tools to compete on cost? Have they chosen the right framework and done the right

analysis? Can their current employees think in terms of reducing costs and increasing

efficiency? Are the employees agile and flexible enough to adjust to the new realities at

the workplace? How well do the employees execute processes and utilize tools? Are the

employees cross-functional enough to break down the communication barriers?

Furthermore, the outsourcing decisions in the supply chain will also depend on

understanding the resources, capabilities, and stability of the outsourcing firm. Some of

the advantages that outsourcing firms can provide are: economies of scale & scope by

executing modularized activities belonging to their client firms, specialized skills in

specific processes & tools, and superior execution capabilities. Generally, outsourcing

firms manage continuous & repetitive activities better than many other firms. However,

pharmaceutical firms will have to be aware of the fact that the outsourced activities often

change and adapt to the business models of outsourcing firms over time.

To be sure, pharmaceutical firms will have to consider factors that might negate

the list of positives of the outsourcing decision. Issues such as distance, culture, control &

co-ordination, and quality can severely affect the effectiveness of any outsourcing

relationship. It is worthwhile to investigate the impact of outsourcing on the ability to

optimize the supply chain as a whole. How will the outsourcing firm interact with the

pharmaceutical firms' planning & strategy departments? A loss of control will require

additional effort and resources to coordinate with the outsourcing partners. The risk

becomes greater as more and more activities are outsourced and new partners are

included in the supply network since the supply network is only as strong as its weakest

link.

In any sort of meaningful outsourcing relationship, control & visibility of

activities and performance measures over time will become important decision variables.

Pharmaceutical firms will have to know the outsourcing firms' future plans and why their

internal processes are unique that give these firms significant competitive advantages.

On the flip side, a pharmaceutical firm may also have to share their strategic and

performance metrics with its outsourcing partners. Therefore, trust will be a key to the

success of the relationship.

As can be seen by the discussion so far, choosing to outsource is a subjective

decision and its success depends on the effectiveness of the complementary processes put

in place by both parties. As long as the pharmaceutical firm has control over the design

and process flow of their operations, outsourcing of day-to-day operations to take

advantage of lower labor costs and greater efficiencies might work.

It should also be pointed out that outsourced functions might not result in

improved efficiencies due to coordination issues. In other words, it is very important that

the outsourcing partners demonstrate that they have much better capabilities &

technologies than those belonging to the large pharmaceutical firm. There have been

occasions when firms such as Advanced Micro Devices (AMD) had to bring

manufacturing back in house due to the limited availability of production capacity, cost-

control measures, and to establish superior controls.

6.3 Operationalizing Outsourcing Decision

A significant value of logistics lies in how well a firm can restructure its

operations in response to the changing conditions of the market place. Indeed, planning

and control functions become extremely important in aligning activities with the

changing environment. The firm should first consider optimizing the supply chain as a

whole before seeking quick wins by outsourcing its operational needs. To elaborate the

point further, optimizing logistics activities by leveraging freight rates, inflation,

exchange rates, other cost drivers, and aligning various activities with the business

strategy might lead to better alternative supply chain solutions.

Lapide [27] states that firms should not strive to emulate the best practices of

others. The best practices work only under certain business conditions in certain

industries. He provides a framework that has been developed for Supply Chain 20207

(SC2020) initiative. According to the framework, business strategy must be aligned with

the supply chain strategy and operational performance objectives specific to the company.

The operational performance objectives are assessed in terms of customer response,

efficiency, and asset utilization metrics and drive the operations in the desired direction

set by the business strategy of the company.

Business strategy must integrate marketing, supply chain, and technology

strategies. Thus, crafting a business strategy is a complex process that requires insights

and acknowledgement from various functions within the firm and a common

understanding to execute it well. The essence of information technology is to enable

business strategy. Therefore, as business strategy evolves, information technology must

evolve to support it. In the end, change management becomes an extremely critical issue

when executing strategy because it is likely that a firm's employees might not understand

the purpose of change and also resist in adopting new sets of procedures and tools.

Firms also have to be wary of the fact that the outsourced activities might cease to

benefit them as these activities did in the past due to changing business dynamics. Fine

[12] illustrates this aspect by discussing the notion of outsourcing trap where firms

transform their engineers into consultants who now have to define and manage the

outsourcing work. Over time, the engineers loose their hard skills and the technical

solutions are then dictated by outsourcing firms. The new technical solutions proposed by

the outsourcing firm might not be the appropriate solutions for the client firm.

7 Detailed information on the project can be found at www.sc2020.net

6.3.1 Key to Outsourcing

Reflecting on the discussion so far, it can be argued that the question that best frames an

outsourcing decision for a pharmaceutical firm is: "How will an outsourcing decision

optimize my supply chain as a whole and enable it to be the best in class and maximize

profits?" This question will force both the pharmaceutical firm and the outsourcing firm

to look beyond obvious cost reduction goals of certain activities leading to unfruitful

future decisions and think about joint value creation.

To bring some objectivity to this critical decision, a firm can adopt a holistic

approach to improve the quality of its outsourcing decision. The firm should think in

terms of trade-offs that arise due to the current constraints and limitations in the system.

This approach will allow the pharmaceutical firm to quantify the benefits of outsourcing

activities to balance the loss of control & co-ordination. There are various frameworks

that are available within academic institutes and professional consulting firms to explore

the option.

6.4 Building an Excellent Supply Chain

The underlying driver of all frameworks is the alignment of supply chain

activities with the business strategy. This fact demonstrates that firms stand to gain

significant competitive advantage if they are able to figure out which supply chain

models fit their business strategy best. Interestingly, all the frameworks mentioned in the

literature review recognize the importance of visibility, managing uncertainty, and

placing superior control and co-ordination in the supply chain. Therefore, benefits gained

by applying these frameworks might surpass the benefits gained by outsourcing activities.

Thus, an outsourcing decision might become inconsequential to a firm.

61

In summary, frameworks can be classified either as quantitative or qualitative.

Clearly the adoption of these frameworks depends on a firm's orientation and

expectations. However, considering the complexities involved, quantitative frameworks

will have an edge over qualitative-oriented frameworks in the future.

Then, there are methodologies to enhance the operational efficiency based on

Toyota production system and lean manufacturing making use of tools like DMAIC, 5S,

flow charts, takt time, theory of constraints etc. Emerging frameworks are now

introducing advanced operations research analytics to make these methodologies more

robust, insightful, and easily adoptable to complex flows with increased throughput -

Graves [18].

Also, software firms like i2 and others are selling highly integrated industry-

specific proprietary supply chain solutions based on their own methodologies and

frameworks. This is a natural progression for these firms to move away from standalone

products to an integrated product line. It will be interesting to note how these software

firms understand and align their analytics & tools to a firm's strategy. Thus, firms should

understand the analytics embedded in the software vendor's tools, and whether the

analytics align with firms' objectives before adopting these solutions.

7 Conclusion

The thesis concludes by stating that understanding business needs arising due to both

external and internal environment, is an essential first step in finding the value of

logistics in the pharmaceutical industry. We used various frameworks to understand and

explore the business environment, and then map out and align the existing logistics

activities with the business needs to determine the value of logistics in the pharmaceutical

industry. The analysis has yielded the importance of understanding the product attributes

and competitive dynamics in the design of supply chains.

There is a great degree of uncertainty associated with which technology will drive

the future growth in the industry. Indeed, unique supply chain design challenges are

associated with branded chemically-synthesized compounds, branded biologics, generics,

and bio-similars. Branded chemically-synthesized compounds and generics fall under the

umbrella of the commodity product model, whereas complexities associated with

biologics suggests a mass customization model. Commodity product models are directed

towards a larger target base where scale becomes important and mass customization

models target smaller population. A focus on availability is extremely important for the

branded drug segment, which switches to cost as and when patent expires, and generics

tend to follow an extremely cost-oriented supply chain design.

Of late, designing and managing supply chains have become extremely complex

and analytical undertaking. For example, Zara, a fashion apparel firm, recently adopted

customized mathematical algorithms developed using operations research methodologies

to improve decision-making in its supply chains. Zara's supply chain is highly

customized ito focus on speed that aligns very well with its chosen business model.

63

Similarly, the role of supply chain and logistics has gained prominence in the

high-technology arena due to the runaway success of companies such as Dell. It has been

noted in the press that Dell's supply chain is the primary source of its competitive

advantage and plays an extremely important role in that firm's business model.

It is also important to understand that there are various frameworks available that

come with their own unique process methodologies and tools. However, these

frameworks tend to re-orient the firm's activities based on certain assumptions,

constraints, and objectives. If the chosen framework is misaligned with the firm's

business needs or is commonly adopted by firms in an industry, then the value of logistics

may be lost.

Clearly, most firms will not be able to differentiate based solely on operational

metrics, thus, pharmaceutical firms will have to be extremely selective in choosing the

right framework and in some cases they might have to develop their own solutions to

address the unique needs. Along with choosing the right framework, firms will also need

to have the right resources, processes, and tools to manage the activities.

References

[1] Anderson J. and Narus J., Business Market Management: Understanding, Creating,

and Delivering Value, Prentice Hall ISBN 0-13-045187-8 Year 2004

[2] Arrunada B. and Vazquez X., When Your Contract Manufacturer Becomes Your

Competitor. Harvard Business Review September 2006

[3] Blumberg D. and Lacey K., Networked pharma. Pharmaceutical Executive, Eugene:

Jun 2003, Vol. 23, Iss. 6; pg. 72

[4] Bradley S. and Weber J., The Pharmaceutical Industry: Challenges in the New

Century. Harvard business case study 9-703-489 REV. April 2, 2004

[5] Booth, R., The global supply chain, FT healthcare management report. London:

Financial Times Business Ltd. 1999

[6] Byrnes, J. MIT Sloan 15.771J Case Studies in Logistics and Supply Chain

Management Class Spring 2007

[7] Cantow B. and Strauss L., Boston Scientific Corporation, Medical Device Supply

Chain. MIT Supply Chain Context, lAP ESD.262 class, 2007.

[8] Carr N., IT Doesn't Matter. Harvard Business Review May 2003

[9] Danese, P., The extended VMI for coordinating the whole supply network. Journal of

Manufacturing Technology Management Vol. 17 No. 7, pg. 888-907, 2006

[10] Davenport T., MISSION CRITICAL realizing the promise of Enterprise Systems,

Harvard Business School Press ISBN 0-87584-906-7 Year 2000

[11] Field, A., Build Contractor Relationships That Are Mutually Beneficial. HBR

Supply Chain Strategy (A Newsletter from HBS Publishing and MIT CTL) Article

Reprint Number P0602B February 2006

[12] Fine C., Clockspeed: Winning Industry Control in the Age of Temporary Advantage,

Perseus Books Group ISBN 0738201537 Year 1999

[13] Forcinio, H., What Can Radio Frequency identification Do for Pharmaceutical

Packaging? Pharmaceutical Technology Year 2003

[14] Forcinio, H., New Systems for Counterfeit Protection and Quality Control.

Pharmaceutical Technology June 2005

[15] Forcinio, H. and Wright C., Cold Chain Concerns. Pharmaceutical Technology April

2005

[16] Gigoo S., IT Infrastructure Qualification and System Validation. Pharmaceutical

Technology January 2007

[17] Grimley J., Pharma Challenged. Chemical and Engineering News Volume 84,

Number 49 ISSN 0009-2347 December 4, 2006

[18] Graves, S. MIT Sloan 15.762J Supply Chain Planning Class and MIT Sloan 15.763J

Manufacturing System and Supply Chain Design Class Spring 2007

[19] Hayes R. and Fagan P., The Pharma Giants: Ready for the 21st Century? Harvard

business case study 9-698-070 May 6, 1998

[20] Herzlinger R., New Sector Alliance (A): An Entry into Health Care? Harvard

business case study 9-304-004 August 15, 2006

[21] Jamison, M., Kimberly Clark, Strategic Supply Chain Initiatives Presentation. MIT

Supply Chain Context, IAP ESD.262 class, 2007.

[22] Jarvis L., Lure of Biologics. Chemical and Engineering News Volume 84, Number

24 pp. 22-23 ISSN 0009-2347 June 12, 2006

[23] Kulp S. and Randall T., Procurement at Betapharm Corp. (A). Harvard business case

study 9-105-030 Rev. August 25, 2005

[24] Koh R., SupplyScape, Technology in Pharmaceutical. MIT Supply Chain Context,

IAP ESD.262 class, 2007

[25] Koroneos G., FDA Opens Door to RFID Packaging. Pharmaceutical Technology

December 2.004

[26] Koroneos G., Securing the Supply Chain with RFID. Pharmaceutical Technology

September 2005

[27] Lapide L., MIT's SC2020 Project, The Essence of Excellence. Supply Chain

Management Review April 2006

[28] Lee H., Supply Chain Management in the Internet Age. Stanford Executive

Briefings DVD, Kantola Productions (www.kantola.com)

[29] McAfee A. and Reavis C., e-Business@Novartis, Harvard business case study 9-

601-057 REV. AUGUST 10, 2001

[30] McCormick D., Just Tell Us What to Do. Pharmaceutical Technology July 2006

[31] McGahan A., Focus on Pharmaceuticals: Industry Structure and Competitive

Advantage. Harvard Business Review November-December 1994

[32] McFarlan F. and Young F., Cathay Pacific: Doing More with Less. Harvard business

case study 9-303-106 Rev. December 3, 2003

[33] McFarlan W. and DeLacey B., Pfizer's Virtual CIO (Abridged), Harvard business

case study 9-305-018 REV MAY 10, 2005

[34] Miller J., New Supply-Chain Dynamics - Create a Distribution Services Sector.

Pharmaceutical Technology January 2004

[35] Mullin R., Biotech vies for position. Chemical and Engineering News Volume 81,

Number 4 pp. 27-40 ISSN 0009-2347 January 27, 2003

[36] Narayanan V. & Raman A., Aligning Incentives for Supply Chain Efficiency.

Harvard business case study 9-600-110 Rev. April 10, 2000

[37] Narayandas D., Arrow Electronics, Inc. Harvard business case study 9-598-022 Rev.

May 21, 2003

[38] Neway J., Filling the Void PAT in a Connected Manufacturing Environment.

Pharmaceutical Technology October 2003

[39] Nolan R., drugstore.com. Harvard business case study 9-300-036 Rev. April 5, 2000

[40] Palma, A., All Aboard the Cold Chain. Cryoport Transporting Life

http://www.cryoport.com/pressCenter/articles/article_PM.htm

[41] Pisano G. and Rossi S., Eli Lilly and Company: The Flexible Facility Decision

(1993). Harvard business case study 9-694-074 Rev. April 21, 1994

[42] Porter M., Strategy and the Internet. Harvard Business Review March 2001

[43] Rangan V., Merck-Medco: Vertical Integration in the Pharmaceutical Industry.

Harvard business case study 9-598-091 Rev. May 29, 1998

[44] Rosenfield D., & Beckman S., Operations Strategy: Competing in the 21st Century,

McGraw-Hill/Irwin ISBN- 13: 978-0072500783 May 8, 2007

[45] Ruber K. & Stamatellos L., Novartis Pharma AG. MIT Supply Chain Context, IAP

ESD.262 class, 2007.

[46] Shah, N., Pharmaceutical supply chains: key issues and strategies for optimization.

Computer &: Chemical Engineering, 28(6-7): p. 929-941. 2004

[47] Shemanski C. and Clyne G., Applying Part 11 to the Implementation of Quality

Management Software. Pharmaceutical Technology 2005

[48] Simchi-Levi, D., Kaminsky, P. (2000), Designing and Managing the Supply Chain

Concepts, Strategies, and Case Studies, Irwin/McGraw-Hill, New York, NY.

[49] Singh, M., The Pharmaceutical Supply Chain: a Diagnosis of the State-of-the-Art.

MIT MLOG Thesis June 2005

[50] Vaczek, D., Looking into the Supply Chain. Pharmaceutical & Medical Packaging

News September 2006

[51] Wechsler J., The Push for Generic Drugs Accelerates. Pharmaceutical Technology

December 2006

[52] Wechsler J., Counterfeiting, Compliance, and Controls. Pharmaceutical Technology

September 2003

[53] Wells J., The Pharmaceutical Industry in 2005. Harvard business case study 9-706-

423 October 27, 2005

[54] West J., Eli Lilly and Company: Manufacturing Process Technology Strategy (1991).

Harvard business case study 9-692-056 Rev. October 1, 1998

[55] Williams S., Packaging Becomes Part of the Prescription. Pharmaceutical

Technology March 2005